Harsh Gupta and I have co-authored a piece on why India should scrap the Securities Transaction Tax (STT):
A transaction tax on securities barely hurts the speculator, but makes several trading strategies that provide liquidity and depth to the market unviable because of the artificially introduced layer of friction. Frequent trading can result in so much taxation that all trading profits are swallowed up by the transaction tax.STT contributes only around 1.5% of the government’s direct tax revenue, but its impact through destroying market liquidity and depth is outsized. The government’s net collection from STT runs into several thousand crores cumulatively since the tax was implemented. The absolute tax revenue collection through STT is small but significant, and widely dispersed but internecine for the market. While low taxes are always better for traders, consumers and citizens, the government can make up the shortfall by rationalizing the taxation across different types of equity investors.
More here.